2. Fouzan Rafi
Ch Talha
Hajra Asif
Aqeel Gul
Abdul Wahab Shah
Shavai Zia Butt
Aqib
Fareeha Ramal
Ayesha
Noor Ul Ain
Asad Farooq
Haroon Ali Zar
GROUP MEMBERS
3.
4.
5.
6. What assets are recorded at historical cost?
• Property, Plant and Equipment is recorded at its historical cost.
It includes:-
Purchase price, including
import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.
• Liabilities are also accounted for using the historical cost
principle. When bonds or other debts are issued or received,
they are recorded on the balance sheet at the original
acquisition price
7. How is the historical cost principle calculated?
The historical cost principle states that
businesses must record and account for most
assets and liabilities at their purchase or
acquisition price. In other words, businesses
have to record an asset on their balance sheet
for the amount paid for the asset.
8. Example:
A machine was acquired 5 years ago for $10,000.
New machine with the same specification would cost $40,000 today due
to inflation.
The current market value of the machine in its present condition is
$6,000.
Machine is depreciated using straight line basis over its useful life of 10
years.
Using the historical cost convention, what would be the net book value
of the machine today?
Solution:
Net book value = Cost - Accumulated Depreciation
= $10,000 - ($10,000 x 5/10)
= $5,000
The machine would be assigned a historical cost of $10,000. The
replacement value (i.e. $40,000) and fair value (i.e. $6,000) would not
be considered in the valuation.
9. Is historical cost the same as book value?
Yes. Historical cost is the cost at which the asset was
procured.
Book value is the depreciated cost.
10.
11.
12. Examples
– The Washington Company constructed a building at a cost of $45,000 in 2005. On
December 31, 2017, the fair market value of the building is $65,000 but still stands on
the balance sheet at its original cost of $45,000.
– The New York Company purchased a tract of land for $50,000 on January 1, 2010.
Today the fair market value of the land is $65,000. Although the economic value or
market price of the land has increased, the company would continue reporting it at its
historical cost of $50,000.
13. Advantages Of Historical Cost:
• Historical cost accounts are straightforward to produce.
• Historical cost accounts do not record gains until they are
realized.
• Historical cost accounts are still used in most accounting
systems.
14. Disadvantages Of Historical Cost:
• Historical cost accounts give no indication of current values of the
assets of a business.
• Historical cost accounts do not record the opportunity costs of
the use of older assets, particularly property which may be
recorded at a value based on costs incurred many years ago.
• Historical cost accounts do not report/account the loss of real
value of nominal monetary items as a result of inflation or the
gain in real value in nominal monetary items during deflation.
